China and the US need new rules of engagement, not just a trade deal

Any agreement reached in renewed talks between the two is likely to be short-lived, as the cooperation that once underpinned deeper economic integration has been replaced by outright rivalry. The relationship must be redefined

Stephen Olson

Published: 1:30am, 2 Jul 2019

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Meeting on the fringes of the G20 summit in Osaka, US President Donald Trump and Chinese President Xi Jinping have reached an agreement to resume trade negotiations that were suspended in early May in response to what the US characterised as backsliding on the part of China.

As part of the agreement, the US will refrain, at least for the time being, from applying tariffs on the roughly US$300 billion in Chinese imports not yet subject to punitive measures. Previous tariffs will remain in place. The US will also grant a partial reprieve to Huawei, removing some of the curbs on US equipment sales. China, for its part, committed to an unspecified amount of US agricultural purchases.

As negotiations recommence in earnest, what are the key dynamics likely to shape how the discussions unfold from here?

The Chinese government recognises that at least some of the dubious policies and practices it was able to “get away with” in the past are no longer tenable in the current environment. Some concessions will be necessary to forestall a further deterioration in the bilateral trade and investment relationship, and the painful disruptions that would result.

Some of these concessions – such as additional purchases of US soybeans or liquefied natural gas – will be relatively easy, provided the volumes are within reason. And even in the more difficult areas, such as technology policies, China understands that it will have to make at least some adjustments on the margins.

But – and this is a very large caveat – China will not do anything that will substantially constrict its ability to pursue its national economic development objectives. China most certainly will not dismantle its industrial policies.

The success or failure of the negotiations will hinge largely on whether the concessions China is able to offer on industrial policies will be sufficient from the US point of view. However, China’s pullback in previously offered concessions, which precipitated the breakdown in negotiations in early May, does suggest that internal pressures against too much compromise are mounting in China.

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In the US, political considerations are now front and centre. The White House will evaluate every major policy decision based on whether it will be an asset or liability for Trump’s re-election campaign. An agreement that can be credibly presented to the US public as a “victory” that advances US interests would be warmly embraced.

But, if the best deal available would leave the president vulnerable to charges from his Democratic opponents that he has “gone soft” on China, then the political imperative will be for Trump to walk away.

Irrespective of how discussions unfold from here forward, one lesson has undoubtedly been internalised in Beijing: China can no longer allow itself to be dependent on the US for technologies that are critical to its development objectives.

The willingness of the US administration to cut off (or threaten to cut off) Chinese national champions such as Huawei or ZTE from access to essential US chip technologies has revealed a glaring vulnerability and presumably generated deep consternation among Chinese policymakers.

Will US policy on China change if Trump loses, and does Xi care?

China has a variety of means at its disposable – some fair, some unfair – to attempt to close the technology gap. Expect such efforts to be accelerated and expanded across the board. How – or if – these efforts can be squared with a trade agreement with the US remains entirely to be seen.

Since the early 2000s until recently, the prevailing trade policy narrative in the US towards China had been fairly benign, despite a variety of commercial frustrations and complaints about China’s World Trade Organisation compliance. Overall, deeper economic integration between the two countries was seen as desirable, both for economic and geostrategic considerations.

That benign policy narrative has now almost completely collapsed in the US. It is being replaced by a new narrative which sees the playing field as fundamentally lopsided to China’s advantage, with trade and investment being massively beneficial for China and less beneficial – even detrimental – to the US. Deeper economic integration is no longer the objective. In fact, many are calling for a reversal of such integration.

Indeed, the only issue that unites Democrats and Republicans today in Washington DC is the need to take a harder line with China on trade issues. These sentiments were not created by Trump, and will survive well beyond a Trump presidency.

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The US-China trade relationship has crossed the Rubicon and irrespective of any short-term trade deal that might ultimately be reached, it will not revert to the antebellum status quo. All sides would do well to recognise – and adjust to – the new realities.

There will continue to be areas where trade and investment between the two countries can flourish and bring mutual benefit. But given the wide differences in economic systems, the high levels of integration initially envisioned during the early days of China’s WTO accession might prove to be unrealistic.

The discussions that are now resuming present an opportunity to at least begin the long-term process of redefining the relationship more in line with reality and hammering out a pragmatic modus vivendi that will meet the needs of both countries. It will not be accomplished quickly, but it is overwhelmingly in the best interests of both countries.

Stephen Olson is a research fellow at the Hinrich Foundation

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